California Wildfires, Property Damage, and Mortgage Repayment

Abstract

This paper examines the impact of wildfires on mortgage repayment using novel data that combine property-level damages and mortgage performance. We find that 90-day delinquencies were 4 percentage points higher and prepayments were 16 percentage points higher for properties that were damaged by wildfires compared to properties 1 to 2 miles outside of the wildfire perimeter, which suggests higher risks to mortgage markets than found in previous studies. We find no significant changes in delinquency or prepayment for undamaged properties inside a wildfire boundary. Prepayments are not driven by increased sales or refinances, suggesting insurance claims drive prepayment. Almost 40 percent of affected households receive insurance settlements lower than the estimated replacement costs that define coverage limits. This underpayment and the resulting deficits imply that households receive about $200,000 to $300,000 less than their entitled amount under California law.

Keywords: Wildfires, Mortgage, Prepayment Risk, Climate Risk, Physical Risk, Underinsurance

JEL Classification: G21, G51, Q54